Ecuador’s new mining law one step closer to reality

New mining legislation has passed yet another hurdle in Ecuador this week, buoying hopes that foreign mining companies soon will be able to get back to work in the mineral-rich country.

Ecuador’s Legislative Commission approved the new mining code by a vote of 50-15 in its second reading and it now awaits final approval from President Rafael Correa before it becomes law.

Many foreign miners are confident the president will approve the law quickly – most likely before the end of this month.

“The president has come out on numerous occasions saying he wants environmentally responsible mining in the country in which all stakeholders get to participate in the benefits,” Nick Furber, chief financial officer of Dynasty Metals & Mining (DMM-T) said in an interview. “I think it [the new law] will be passed in the next week or so.”

The Canadian junior, whose shares jumped 17.5% to C$3.90 on the news, owns the Zaruma project, a high-grade gold deposit in southern Ecuador. The project was supposed to have started production in June 2008 but construction was scaled back when the Ecuadorian government froze mining exploration and revoked most concessions on April 18.

Zaruma’s gold plant is now expected to move into production at the end of March. Initially Dynasty plans to process 300,000 tonnes of ore to produce about 100,000 ounces of gold annually.

Zaruma has a measured and indicated resource of 1.11 million oz. gold at an average grade of 13.93 grams per tonne. Inferred resources total 1.38 million oz. gold at an average grade of 12.72 grams per tonne.

Commenting on the mining law development in an email bulletin to shareholders, Colin McKenzie, president and chief executive of Cornerstone Capital Resources (CGP-V, CTNXF-O), described the 50-15 vote in the assembly as “a key milestone in getting our projects back on track.” But he cautioned the new mining law “has not passed as an organic law” or a high-level statute that has precedence over other laws.

“While it is not clear how the mining law will work in conjunction with other new laws governing such things as the environment, water and indigenous rights; the lack of organic status will likely mean a more complex operating environment for exploration and mining projects,” he wrote.

McKenzie also pointed out that the congress had introduced 11 minor revisions during the second debate, but said they “do not represent a material departure from earlier drafts.” McKenzie was out of the office and could not be reached for comment.

Cornerstone started exploring in Ecuador in 2005 and that year acquired four early stage gold projects and an advanced gold-rich VMS project. Today Cornerstone has extensive land holdings in nine individual projects, one of which is a joint venture with Coastport Capital.

While the news is certainly a positive step forward,  a number of  uncertainties remain,  even after the new law is passed. These include how separate tax legislation that calls for a windfall profits tax on natural resource companies will affect mining companies. The question will be at what gold price will the windfall profits tax kick in. Another is that companies will still have to negotiate their contracts with the government on a case-by-case basis.

Nonetheless, several companies with properties in Ecuador saw their share price rise on the news. Shares of  Kinross Gold (K-T) climbed 7.8% to C$20.41 apiece. Kinross owns 100% of the Fruta del Norte project in southeastern Ecuador, a high grade, intermediate sulphidation epithermal gold-silver system, which it acquired from Aurelian Resources in September 2008.

Kinross is eager to develop its Fruta del Norte project, which has a National Instrument 43-101 compliant initial inferred mineral resource of 58.9 million tonnes grading 7.23 grams gold per tonne and 11.8 grams silver per tonne for 13.7 million ounces of contained gold and 22.4 million ounces of contained silver.

Iamgold‘s (IMG-T, IAG-n) shares also climbed 7.8% on the news to C$7.08 per share. Iamgold owns 100% of Quimsacocha, a 3.5-million-oz. gold project in southern Ecuador, about 480 km south of Quito.